Atlas Energy Inc. has taken on India’s largest company by market value, Reliance Industries Ltd., as a drilling partner in the Marcellus Shale in a transaction worth an estimated $1.7 billion, the companies announced Friday.
Reliance, whose recent market value was pegged at $78 billion, operates India’s largest natural gas field and owns the world’s largest refining complex. A Reliance affiliate agreed to pay Atlas $340 million in cash once the joint venture (JV) closes, and it would pay another $1.36 billion in a drilling carry. The acreage acquired through the partnership could support more than 3,000 wells “with a net resource potential of about 13.3 Tcfe,” Reliance said.
“Low operating costs and proximity to U.S. Northeast gas markets combine to make Marcellus one of the most economically attractive unconventional natural gas resources in North America,” Reliance stated. CFO Alok Agarwal said the company, which currently produces about 3 Bcfe/d from its exploration and production (E&P) operations, plans to spend $5 billion in the gas play over the next 10 years.
Reliance joins an all-star cast of international heavyweights that are pursuing onshore shale acreage in North America, including mainstays ExxonMobil Corp., BP plc and Royal Dutch Shell, along with Total SA, Statoil ASA and Mitsui & Co.
Atlas CEO Edward E. Cohen called Reliance, which is helmed by Indian billionaire Mukesh Ambani, “one of the world’s largest vertically integrated energy companies, and one that has demonstrated exceptional capability in all aspects of the energy business.”
The transaction, which is expected to be completed this month, “will enable us to accelerate sharply our development of the Marcellus while further reducing our already low finding and development costs, and our capital structure will immediately benefit from reduced leverage and enhanced liquidity,” said Cohen.
Under terms of the JV, Reliance would acquire a 40% undivided interest in about 300,000 net acres (120,000 net acres), of undeveloped leasehold held by Atlas, with Atlas retaining the majority stake. In addition to funding 40% of its drilling obligations, Reliance would fund 75% of Atlas’ portion of drilling and completion costs until a $1.36 billion drilling carry is fully used.
“Reliance has large potential cash flow from its domestic gas field and refinery, and this gives it the ability to buy more assets,” said Deven Choksey, an analyst who covers the company. “Even better than that, they get access to a new unconventional technology for gas production.”
Atlas, based in Moon Township, PA, would serve as the JV’s development operator. Reliance would have the option to operate in some project areas in the coming years that are outside of Atlas’ core operating areas in Fayette, Greene, Washington and Westmoreland counties in southwestern Pennsylvania. Atlas has five and a half years to use the drilling carry, which could be extended by two years in certain conditions.
The JV partners agreed to a five-year development plan that calls for drilling 45 horizontal wells through the rest of this year, which would increase to 108 wells in 2011, 178 wells in 2012, and 300 wells in 2013 and 2014.
Atlas would act as the sole leasing agent for the JV in the area of mutual interest (AMI). “In the near future,” Atlas and Reliance expect to “considerably grow” the JV leasehold within the AMI, Atlas said. Reliance would have the option to acquire a 40% share of the new acreage acquired, with each party paying its proportionate share of acquisition costs.
In addition, if Atlas decides to sell all or part of the 280,000 additional Appalachian Basin leasehold it currently controls but excluded from the JV and not included in the AMI, Reliance would have a right to purchase the acreage for $8,000 per acre. Reliance also receives a right of first offer with respect to potential future sales of the acreage by Atlas at lower prices. This acreage is predominantly in Mercer, Crawford and other Pennsylvania counties not currently included in Atlas’ core Marcellus area of southwestern Pennsylvania.
According to RBC Capital Markets’ Scott Hanold, Marcellus Shale leases in five sales made public this year have sold for a median price of $4,828/acre. The Reliance-Atlas transaction is “the most lucrative” to date, he said. “It’s a significant chunk of acreage in an area with some of the best well results.”
The JV could increase output from the play by more than 30% a year, said Hanold. More aggressive drilling, he noted, also could lead to an expansion of Atlas Pipeline Partners LP, which is controlled by Atlas and Williams Partners LP.
In an interview with CNBC Friday, analyst S.P. Tulsian, who covers Reliance, said the transaction was “likely to be positive. What we have been seeing is that for the past couple of months Reliance has been desperately hunting for some acquisitions…Since there is no organic growth happening on the domestic front whether on the E&P or petrochemical or refinery, it has become compulsory for the company to go for an overseas acquisition of this size.”
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